Health care reform: Know the rules and penalties of the individual mandate

May 29, 2013

The individual mandate starts in January 2014 and is an important part of the Affordable Care Act. The individual mandate requires people legally living in the U.S. to buy a minimum amount of health coverage unless they are exempt. In general, people who don’t have to file taxes due to low income are exempt from the individual mandate.

But how does it work? And what are the penalties for people who don’t get coverage?

How the individual mandate works

When people file their 2014 taxes in 2015, they’ll need to report whether or not they had health coverage in 2014. If they did have coverage, they will need to report if they qualified for a tax credit or subsidy. Health coverage includes a group plan, an individual plan, Medicare or Medicaid. If they don’t have health coverage, they could face a tax penalty. Each year, the penalty increases.

What are the tax penalties?

If a person doesn’t have a health plan, he or she will pay a tax penalty as follows:.

  • 2014: Penalty is the larger amount – $95 or 1% of taxable earnings
  • 2015: Penalty is the larger amount – $325 or 2% of taxable earnings
  • 2016: Penalty is the larger amount – $695 or 2.5% of taxable earnings

What happens if your clients can’t pay for a plan?

People may qualify for a tax credit through the exchange based on their incomes. People earning between 100% and 400% of the federal poverty level can qualify if they are not eligible for other sources of minimum essential coverage, including government-sponsored programs such as Medicare and Medicaid.

This includes:

  • Individuals with modified adjusted gross incomes of $11,490 to $45,960 a year
  • Families of four with modified adjusted gross incomes of $23,550 to $ 94,200 a year.

People may qualify for cost-sharing subsidies based on their income. This includes:

  • Individuals with modified adjusted gross incomes of $11,490 to $28,725 a year.
  • Families of four with modified adjusted gross incomes of $23,500 to $58,875 a year.

To learn about other health care reform topics, check out the timeline and FAQs on our broker/employer health care reform website or visit our member website,

This article applies to:

  • California, Wisconsin, Virginia, Ohio, New York, Nevada, New Hampshire, Missouri, Maine, Kentucky, Indiana, Georgia, Connecticut,  and Colorado
  • Small Group, Large Group,  and Individual (under 65)

Is the Cost of Healthcare Really on the Decline?

With the expenses associated with health reform and ever increasing premium rates, it is hard to believe that recent studies are actually showing that healthcare costs are on the decline. For the third year in a row, the Centers for Medicare and Medicaid Services have docked the national health growth expenditures at a record low of 3.9 percent. Some, including actuaries, academics and other analysts have attributed the slowing of health expenditures to be repercussions of the lingering recession and the well-known association between unemployment and the decline in insurance coverage.

Health Affairs was just one of the journals to come out with health cost findings this week. In their study it was suggested that the fundamental structural changes to our health system has also contributed to the decline in health expenditures; specifically with the creation and heighten popularity of entities such as competition among health providers and health systems to achieve the highest standard of care, changes to the fee-for-service system, patient-centered medical homes and accountable care organizations (ACO), to name a few. As expected, the Obama Administration has claimed that this trend is due to the success of PPACA. Changes to Medicare policies and coverage changes were also noted as explanations for the spending slow down. Judging by this study, others like it and sheer economic history, we know that the state of the economy has direct impacts on the healthcare industry. Using these indicators we can expect that the country will return to historically high cost levels as the economy continues to recover.

Health Affairs also released a study this week that examines other reasons as to why spending growth has hit a record low. In areas of the country where job loss was not a factor, spending was higher but health expenditure rates still fell. David Cutler and Nikhil Sahini, two Harvard scholars, noted that the healthcare expenditure slow down actually began before the recession, meaning that there are other factors that may have been overlooked that have also caused healthcare expenditures to slow. The two argue that at least a small fraction of the slowdown is a result of the insurance coverage distribution. Other more significant reasons, which are still theory and have yet to be proven, are the sharp slowdown in prescription drug expenditures, new developments in imaging technology, population growth (largely below the Federal Poverty Line), aging baby boomers and migration in and out of the public and private systems.

With all of these factors playing some sort of role in the health expenditure slow down we are left with a key question–is this sustainable? Studies have shown that if the economy improves and health insurance coverage is expanded to the millions of people intended under PPACA then the reasons for the current healthcare slowdown will diminish. However, current predictions on the economic recovery are modest for the coming years and the economy is expected to slow significantly once again come 2018, which means that there is a chance that health expenditures will continue to decrease. If PPACA rolls out the way the Obama Administration hopes, with millions of Americans gaining insurance coverage through the competitive exchanges and many enrolling in Medicaid, the sheer competitiveness of the marketplace will naturally drive costs down. While we have not necessarily seen the evidence to back up this theory yet, we hope that it will all somehow fall into place!

Premium Tax Credits for Low-Income

Premium Tax Credits for Lower-Income Individuals
In 2014, a “premium tax credit” will be available to help pay for coverage purchased through the Exchange for individuals and families:
  1. Who do not qualify for Medicare or Medicaid and
  2. Are not offered affordable, minimum value health insurance through an employer,
  3. Taxpayers, with income between 100% and 400% of the federal poverty line (FPL)
  4. Purchasing insurance through an Exchange.
% of FPL
Annual Income (family of 4)
Unsubsidized Annual Premium
Tax Credit
Annual Premium After Credit
Monthly Premium After Credit
Adjusted 2013 Federal Poverty Guidelines

48 Contiguous States and DC
Note: The 100% column shows the federal poverty level for each family size, and the percentage columns that follow represent income levels that are commonly used as guidelines for health programs.
Household Size
For each additional person, add
Source: Calculations by Families USA based on data from the U.S. Department of Health and Human Services
Determining eligibility for the premium tax credit
Modified” gross income is calculated which includes Social Security benefits that are not included in gross income for the taxable year.  In addition, some individuals and families will qualify for a cost-sharing reduction subsidy to help with deductibles and co-payments.
How will services be paid?
When an individual receives covered essential health benefits, the provider will collect only the amount of cost-sharing specified in the silver plan variation in which the individual is enrolled. The federal government will pay the insurer in advance the amounts estimated to cover the cost-sharing reductions associated with the specific silver plan variation. HHS intends to propose that this advance cost-sharing reduction payment to the insurer would occur monthly, and that, after the end of the calendar year, the federal government would reconcile the advance payments to actual cost-sharing reduction amounts.
The Exchange Determines Eligibility for Premium Tax Credit and Cost-Sharing Reductions.
Exchanges must have a coordinated system of eligibility so that an individual can simultaneously apply for enrollment, apply for premium tax credits and apply for cost-sharing reductions. Proposed IRS regulations would permit the disclosure of income and other specified information about an individual taxpayer to HHS for purposes of making eligibility determinations for advance payments of the premium tax credit or the cost-sharing reductions.
Ineligibility for the tax credit (groups with over 50 Full Time Equivalent Employees)
As a general rule, if an Applicable Large Employer’s plan constitutes “minimum essential coverage” in that it is both affordable and provides minimum value, merely being eligible for the plan will make an employee ineligible for the tax credit. The final regulations clarify that an eligible employee who declines enrollment in such a plan remains ineligible for the tax credit for each month in the coverage period related to the enrollment period (e.g., for the full plan year in the case of an annual enrollment period).
This information is subject to future guidance and regulations

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